Is a progressive capital gains tax even constitutional?

As Olympia debates the merits of a proposed 7.5% capital gains tax, it remains unclear if a progressive capital gains tax would even be allowed under the state constitution. That depends on how the state Supreme Court would ultimately classify capital gains taxes. Section 7 of the state constitution says “all taxes shall be uniform upon the same class of property”, which requires uniform tax rates.

The state Supreme Court has repeatedly ruled over the decades that a person’s income is their “property.” Those rulings and the constitution’s requirement for uniform taxes have waylaid the Left’s ambitions for a progressive income tax in Washington. If the state wanted to tax some people’s income at, say, 15%, it would have to tax everyone’s income at 15%.

Supporters of a capital gains tax have tried to work around the “income as property” problem by defining the tax as an excise tax, not an income tax. That strategy has been tried before, after Washington’s brief income tax experiment was struck down by the state Supreme Court in the 1930’s. It was not successful.

If a capital gains tax passes there will no doubt be a court challenge. The court will have to decide, are a person’s capital gains their property as laid out in the state constitution? If so, the rates on their taxation would have to be uniform. If not, what is the distinction? How is income a person derives from a job or a business different than income derived from an investment?

The constitutional questions are just one more reason this capital gains tax proposal is a half-baked idea.
-Rob McKenna

Rob served two terms as Washington’s Attorney General, from 2005 to 2013. He successfully argued three cases before the U.S. Supreme Court and negotiated three of the largest consumer financial protection settlements in national history, all involving mortgage lending and servicing. He is a recognized leader in the development of consumer protections on the internet, in data protection and privacy regulation.